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Dollar Gains Ahead Of MPC And ECB

Published 11/06/2014, 12:40 AM
Updated 07/09/2023, 06:31 AM

RCIS Index Trading

This method of using bespoke FX indexes to compare the strength of multiple currencies aims to find trading opportunities that can sometimes get lost in the noise and distortions of charting using individual currency pairs. Reasonably well correlated with key dollar pairs as a result of the index weighting but often significantly different, we are able to trade divergences between the index charts and the major dollar pairs. All of the indices have positive polarity, meaning that when the Yen strengthens for example, the JPY% index chart will rise. You can also purchase these indexes for NinjaTrader from the link at the bottom of this analysis.

Outlook

Quite an unusual day overall with the dollar higher against most, but there were a few anomalies along the way. The Australian dollar crumbled and was the most volatile recipient of dollar strength in contrast to the previous day’s gains for the Aussie against dollar consolidation. EURCHF selling has meant that the Swiss Franc was the least volatile, resisted the day’s dollar rally better than the other majors, with the exception of the pound, which dropped quite significantly after a poor UK services PMI but then rebounded very sharply from key support once again. There was market talk of mergers and acquisitions as a driver for this price action. The Yen continues to plummet, although there are certainly some red lights starting to flash and we could see the sell-off become more moderate and perhaps even a small amount of two way order flow from key levels for the Yen.

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Thursday sees the MPC and the ECB on the wires so there is the potential for a further choppy day. The market expects bells and whistles from the ECB in order to hold onto their massive short positions. Any hint that further easing may not happen or might be watered down as a result of turmoil at the ECB would very likely see a good spike higher for the Euro before the selling resumed. The Q&A session will no doubt be enlightening as the press will jump on the recent rumours regarding the discord at the ECB.

USD% Index

USD Index
The dollar never did make it as far as the USD% index support with a confluence of the USDJPY 50 hour moving average and the hourly ichimoku kumo support proving too strong, propelling USDJPY higher once again. Near term dollar resistance is now in the 1.2440 region for EURUSD going into the ECB meeting on Thursday although we have plenty of headroom within this USD% index bullish channel before we can call this move overbought.
I am bullish USD%

USD% Index Resistance: EURUSD 1.2440, 1.2400, 1.2372, 1.2340
USD% Index Support : EURUSD 1.2540, 1.2577

EUR% Index

EUR Index
We ended the day right back at key support for the EUR% index so it seems unlikely that anything too wild will happen ahead of the ECB from now. EURUSD 1.2470 is the key level to hold or break, with a push below the level opening up room for a sell-off towards the 1.2376 region. Trend remains bearish although is considerably choppier in recent trading which could indicate a weakening of trend. The 100 hour moving average is currently in the 1.2512 region for EURUSD with the 200 hour still a possibility for test at 1.2583. I am bearish EUR%

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EUR% Index Resistance (EURUSD Support): EURUSD 1.2514, 1.2500, 1.2574
EUR% Index Support (EURUSD Resistance): EURUSD 1.2470, 1.2375

JPY% Index

JPY Index
There is currently divergence between the JPY% index which continued lower to make a fresh low and Nikkei 225 futures, which failed to make a higher high. We are very close to our near term target for this bearish Yen move so the bearish channel support that comes in at 115.50 could see some profit taken off the table for some traders allowing for a bit of relief for the Yen via position squaring. The trend will remain bearish as a result of the increased dovishness from the BOJ, but we are now in a ‘fade the yen strength’ mode rather than ‘pile in with yen shorts regardless’ mode. I am bearish JPY%

JPY% Index Resistance (USDJPY Support): USDJPY 113.80, 113.14, 112.21
JPY% Index Support (USDJPY Resistance): USDJPY 115.00, 115.50

GBP% Index

GBP Index
The talk of mergers and acquisitions relating to the UK was enough to see the lows of the day rejected quite convincingly and as such we remain above key support even after a poor result from the usually quite critical Services PMI. This could also be a function of traders taking profit early due to worries about what the MPC might say in terms of their increasingly hawkish stance. Whatever the reason we have ended the day where we started and now printed a bullish daily pin bar from key support. EURGBP continues to challenge recent bearish channel support which again is another reason to be slightly bullish the pound. Overall, the lack of a break of bearish trend means that we are neutral until further notice. I am neutral GBP%

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GBP% Index Resistance: GBPUSD 1.6013, 1.6087
GBP% Index Support: GBPUSD 1.5962, 1.5900, 1.5855

AUD% Index

aud index wed 5 nov 14
The 100 hour moving average saw considerable selling pressure enter during the Asian session last night which continued right the way through the European and US sessions with the Aussie all the way down at 0.8559 at present. Australian Employment Change was positive with growth in the labour market, but the market sold the pop higher and continued lower regardless. We’ve yet to break a medium term trend line at the 0.8560 level for AUDUSD, which if broken could see the previous major low tested at 0.8489. This level will almost certainly get some attention so it will be important to see how the market reacts to this key support. .I am neutral AUD%

AUD% Index Resistance: AUDUSD 0.8612, 0.8644, 0.8721
AUD% Index Support: AUDUSD 0.8559, 0.8500, 0.8489

CHF% Index

CHF index
EURCHF failed to push back above the 1.2050 level which has seen some strength creep into the Franc, although his has been trumped by dollar strength so the CHF% index has pushed lower for the day, albeit not as low as the Euro. Like the rest of the indexes, we are near some big levels technically and as such the risk of a break of trend or a correction for the Franc is increasing but this remains a market wide issue rather than an issue specifically to with the Franc. Until then though, trend remains bearish. I am bearish CHF%

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CHF% Index Resistance (USDCHF support): USDCHF 0.9632, 0.9600
CHF% Index Support (USDCHF resistance): USDCHF 0.9700, 0.9750

LittlefishFX Relative Currency Index Strength

All of the currency indexes used for this analysis are available as a NinjaTrader indicator from the link below. They are eight indexes, USD, EUR, JPY, GBP, AUD, CHF, CAD and NZD with each index made up of the remaining seven pairs, weighted in accordance with the distribution of global FX volume as measured by the Bank of International Settlements in their Triennial Survey.

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